Inflation and deflation (Macro) Flashcards
Inflation, deflation, disinflation and issues surrounding each.
What is inflation?
Persistant rise in prices
What is deflation?
Persistant fall in prices
What is disinflation?
A fall in the RATE of inflation
What are the types of inflation?
-cost push and demand pull
What does fishers equation say about inflation?
That inflation is determined by the money supply, increasing the money supply increases prices. MV=PQ, where Velocity and output are constant.
What happens in cost push inflation?
Rises in firms costs of production lead to a fall in the SRAS, and consequently prices increase.
Why is cost push inflation bad?
Can reduce real GDP,
What happens with demand pull inflation?
Rise in AD leads to a movement along the LRAS curve and prices increase.
When will demand pull inflation be worst?
When the economy produces at its maximum potential.
What is the problem with deflation?
Increases the real value of debt and can lead to delayed consumption and sticky wages leading to real wage unemployment
What is the problem with inflation?
Fiscal drag, intrest rates will be increased and so borrowers suffer, Increased menu and search prices.
What does inflation do to exports?
reduce competitiveness as the goods prices are higher than foreign goods.
What happens to the exchange rate when inflation occurs?
The interest rises and so the currency depreciates against the country with lower inflation and lower interest. According to the ‘law of uncovered interest rate parity’.
What could influence inflation?
Commodity prices, AD, exchange rates
Types of deflation?
Malignant and Benign
What is benign deflation?
When deflation occurs as a result of increased LRAS
What is malignant deflation?
When deflation occurs due to falling AD
